SQUARE ENIX HOLDINGS CO., LTD.
2Q FY2018/3 Financial Results Briefing Session Q&A
Date/Time: November 8, 2017 (Wed); 5:30-6:30pm (JST)
On behalf of the Company: Yosuke Matsuda, President and Representative Director
Q: Why is the balance of your content production account larger now than it was at the end of FY2017/3 even though “DRAGON QUEST XI” has already been released?
A: Development efforts for major titles are underway at both our overseas and domestic studios. We will be making announcements about the release dates of those titles between the end of FY2018/3 and E3.
Q: Did you book any impairment losses on the content production account at the end of 1H FY2018/3?
A: We did book impairment losses, primarily on smart device titles. We needed to write down the value of titles that have produced a weak response and that do not look promising in terms of their earnings contribution.
Q: You mentioned that you’d be launching major overseas titles in FY2019/3. Given that you will need to amortize considerable development costs in the first year of the titles’ releases, should we expect that they will not contribute to earnings in a major way until at least FY2020/3?
A: While there will be amortization costs, we believe the titles will be of such a quality that we will be able to generate ample profits in the fiscal year of their release. That said, competition is fierce in the Western markets, so we continue to face uncertainty related to the competition the titles might face.
Q: How are you feeling about your potential for reaching the operating income target under your medium-term management plan?
A: We have built a pipeline of major titles, so we are currently exploring how to market and run those so as to maximize their potential. For starters, we definitely want to achieve operating income of ¥40 billion.
Q: What do you think of the platform Steam for downloading PC games?
A: Steam has many users, but our games tend to get lost amongst the many titles it offers. As such, we think it’s important to guide users from our sales website to Steam.
Q: Have your efforts to increase digital sales resulted in any changes to your approach to game development?
A: Now when we are developing the main titles, we in parallel also plan and develop things like post-launch updates and add-on services.
Q: “Left Alive” was introduced in September. What will it cost to develop, and what is the positioning of the title?
A: We want to make it into a AAA brand, but that does not mean that we intend to devote massive development costs to it. Content-wise, the game will be satisfying in a hardcore way, and that’s how we want to market it to players.
Q: You set a target development lead time of around three years for your games, especially your overseas titles. How is that going?
A: I believe you will be able to tell how long our development lead times are based on the launch dates we will be announcing for our games going forward. I will say that we are facing less risk of having to engage in re-work thanks to the precision with which we are approaching our designs in the initial phase of each development project. I believe that the development efforts for the new titles we will be launching starting in FY2019/3 are proceeding in line with our plans.
Q: Do you foresee any changes in the percentage of the smart device game development you do in-house vs. via outsourcing going forward?
A: We have no plans of intentionally changing those percentages. From the perspective of development management, there is no major difference between working in-house vs. with outsourcing. I think the more important question is what to do about a shortage of development resources.
Q: Where do you intend to prioritize allocation of your development resources going forward?
A: We base our development resource allocations on the unique attributes of each platform. In particular, Nintendo Switch makes it easier for us to leverage our back catalog of assets and expertise, so we want to be proactive in creating new IP and rebooting past titles for that platform.
Q: Approximately what percentage of the HD Games sub-segment’s business do you think will be accounted for by digital downloads over the medium to longer term?
A: Digital downloads already account for around 50% of business in the Western markets. Given that the gaming market is shifting further to digital sales, I believe it will reach approximately 70-80%.
Q: What do you think about the current state of your smart device game business and where it is headed?
A: We now have an organization in place that should prevent us from repeating the same mistakes. Once you’ve improved upon quality issues, it all comes down to how fun the contents you produce are, so our next challenge will be to increase the success rate of our titles.
Q: “DRAGON QUEST RIVALS” has been performing well recently, but how do you expect smart device game earnings to trend going forward?
A: It’s true that “DRAGON QUEST RIVALS” is off to a good start, but there are some titles slated for release in the remainder of FY2018/3 that we are going to have to revisit. As such, some uncertainty surrounds our earnings outlook. I would like to reserve any judgment on that until we’ve seen what kind of start the new titles get off to.
Q: What do you think of Nintendo Switch, and how are you approaching development efforts for it?
A: Nintendo Switch is seeing rapid uptake, and we welcome the arrival of such a platform. We intend to be proactive in our development efforts given that it’s a platform that is well suited to the mid-sized titles at which we excel.
Q: How are you going to secure development resources going forward?
A: We want to be proactive in recruiting talented resources regardless of whether they are new grads or mid-career hires. What is key is that our company, brand, and titles be attractive to creators. Our 30th anniversary events and Square Enix Cafes have been part of our efforts to enhance our brand value.
Q: What has led to the increased intensity of competition in the gaming environment?
A: Players have become extremely discerning about game quality. Providing new experiences is also important, and to that end, we would like to make proactive efforts in the mobile AR space.
Q: What is your policy on technological initiatives for AI?
A: We have used AI in some of our games up until now, but we are now researching a variety of potential applications including applying AI or automation to our development processes.